Equity Research Tutorials
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Introduction to Large Cap Stock
Large Cap Stocks refers to firms which have a market capitalization of more than $10 billion.
Market Capitalization is the wallet share the firm is having in the industry and is computed by multiplying the number of a company’s shares outstanding by its stock price per share. Stocks are generally classified as:
Top 20 Large Cap Stocks in US
|S. No||Name||Large Cap ($ bn)|
|6||Alibaba Group Holding||484.7|
|9||Johnson & Johnson||333.1|
|11||Royal Dutch Shell||302.7|
|12||Bank of America||297.1|
|14||Royal Dutch Shell||291.3|
source: ycharts.com, data as of 7th May, 2018
Benefits to invest in Large Cap Companies
Some of the important reasons to invest in Large Cap companies are:
- Large Cap companies are generally very stable making them a safer investment opportunity compared to others. They are the top businesses in their respective industries and can be considered as Market leaders. However, their stock prices may not grow as fast as other smaller companies making them less suitable for all kinds of investors. This is due to limited opportunities to grow after occupying a successful position in the industry.
- Large Cap stocks are generally preferred in case of business cycles going through turbulent times. This is because they are a safer investment and can comparatively withstand a slow down without the threat running out of business. This does not mean they are immune to recessions but have better ability to handle difficult economic scenarios.
- Generally, these large cap stocks pay a dividend on a regular basis as the companies know the stock probably will not appreciate in value as swiftly as a Growth company. It offers another source of income for conservative investors. It is very useful for the investors when bond yields are low. These companies may be profitable but do not have opportunities to grow. Accordingly, investors have to be compensated for the stagnant stock price and have earnings in the form of a dividend.
- These large cap stocks are more liquid making them easier to exit at any point in time. These firms are used as Core long-term investment in a portfolio due to the above factors and thus can occupy a significant section in the allocation of a client’s investment depending on their financial objectives and risk appetite.
Rally of Large Cap Stocks
The Large Cap stocks of the US have been outperforming since 2013 and are expected to continue in the short-run. The reasons for it are:
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#1 – Large Cap Stocks are more Internationally oriented and gain from USD weakness
The S&P 500 has been outperforming the Russell 2000 along with the weakening dollar in 2017. This is due to the USD depreciation offering large MNC’s a boost through:
- Foreign Sales and Exports
- Demand Creation
- Effects of Positive Accounting translation
- Increased Competitiveness
Sub-par domestic economic outcomes and improving foreign prospects suggest U.S. investors should stay focused on the S&P 500. Geographic revenue analysis states that the large Cap companies of the U.S. have foreign exposures as 30% of the S&P 500 revenues come from outside the U.S.
#2 – Earnings from Large Caps Companies Benefit from Lower Effective Corporate Tax rates
Incentives and credits can create a difference in how much a company pays in taxes by effectively lowering a firm’s taxable income. To be eligible for these tax breaks requires spending a significant amount of money which may not be suitable for smaller companies and start-ups. Large Cap stocks can reduce their financial resources in a number of ways since a lot of money is getting spent which may not necessarily be justified.
The U.S. Internal Revenue Service doesn’t tax income earned in foreign countries and many of them have lower Corporate tax rates as compared to the U.S. This makes them outsource many of their functions to foreign countries which in turn prove to be a cheaper option.
#3 – Tighter U.S. Monetary Policy and a Flatter Yield Curve Spurs Large Cap Leadership
The U.S. Treasury yield curve is one of the leading economic indicators and having a direct relationship existed between the yield curve and the performance of the Russell 2000 relative to the S&P 500. A steepening curve today indicates positivity for higher-beta segments of the equity market. Conversely, a flattening curve now points to more challenging economic conditions down the road and bad news for economy-sensitive segments of the stock market.
When the FED commences normalizing the monetary policy, raising of interest rates, flattening the curve and not encouraging to take risks the mature and the established firms in the U.S. equity tend to benefit which reflects the current scenario in the U.S.
This has been a guide to what are large cap stocks. Here we list the top 20 large cap companies along with the benefits of investing in large cap companies. You may also have a look at these articles below to learn more about Corporate Finance –